Last week I spent about 20 minutes with a veteran property developer, he has been in the game for over 25 years, and is a prolific developer and investor. He never seems to do things in a plain vanilla way, his deals tend to have a flair to them and are exotic in their set up.
I love spending time with these types of people, an accountant or a lawyer does not have the on the field experience. Neither do they possess the commercial perspective required to make deals actually happen. There is a reason why they are professionals and not property people.
Property dealers and investors are a rare breed, property veterans with the stars and scars of battle, they have no qualifications. It takes a multitude of skills and experience to be proficient.
To do things in the same way as everybody else will give you a return and perhaps a good one as this is the nature of property, but it will not give you the edge on the market.
I am still learning, and even with the experience I have gained there are some things I know, there are even some things I think I know, then there are things I know I don't know and things I do not even know, I do not know!
The 20 mins I spent with this veteran showed me the latter, what I didn't know, I didn't even know, therefore the time was extremely valuable.
What I got in the meeting was a condensation of 25 years of experience into a small time frame.
This developer owns and develops many properties in London. One of them happened to be a commercial property where the tenant had a long term lease. With commercial property the valuation of the investment comes from how much the tenant is paying, the strength of the company and how long the length of their lease is.
The valuation of a commercial property is often largely based on a percentage of the rental it generates, therefore when it becomes vacant, the property often declines in value.
If there is a good tenant in the property locked in for a long period of time it has more value than an empty one.
His tenant wanted to break the lease, in return for paying a premium. The premium amounted to around £1m so it was a sizeable chunk.
The money would have attracted a large amount of tax, naturally, probably around half of the million would have gone into tax.
However, he discovered something at this point, he had a valuation done with the property occupied by the tenant and a valuation without the tenant in the property. The valuation dropped by an amount broadly equivalent to the premium payable by the tenant when it was empty.
This gave him the insight to accept not a premium from his tenant but a ‘compensation’ for the loss in valuation on his property. The difference in label means you pay no tax on compensation. Thereby saving half of the premium in tax.
I jokingly commentated it pays well to have a coffee with a Jew, which he found exceedingly funny.
The property industry is dominated with people from the Jewish background, from lawyers to dealers to bridgers. Property and the loaning of money has been in their blood probably for thousands of years. The same can be said for the Indians though in my experience they tend to be focused more on the property aspect than the lending side. This is why many of the old Abrahamic scriptures refer to laws on how the charging of interest should be conducted. There are specific biblical Hebrew terms for how the interest is charged, whether upfront or rolled up. A distinction is further made depending on whether the money is loaned to a fellow Jew or a non Jew. Interest is allowable to be charged to the non Jew but not to the Jew.
Interestingly the charging of interest is classed in the Book of Ezekiel as being among the worst sins, and is forbidden according to Jewish law. The Talmud dwells particularly on Ezekiel's condemnation of interest, where Ezekiel denounces it as an abomination, and metaphorically portrays usurers as people who have shed blood.
Islamic finance is also based on labelling. There are two methods, one is to charge ‘rent’ instead of interest; and the other is for the Islamic bank to purchase the property, roll up the interest and add it on to the property price and then sell it on to the ultimate purchaser.
The Bhagavad Gita speaks of a system of transference of knowledge known as Parampara-Praptam; which means knowledge received through disciplic succession. This is true for all fields of activity, this transmission of knowledge is important as it can save a lot of pain and mistakes, if you have the guidance available from day one.
This becomes more powerful when the person you’re hearing from has realized, digested and practiced this knowledge, as opposed to just having a theoretical understanding. You benefit more from the person’s pain of failure more than the sweetness of success.
Doing property successfully requires experience and on the ground knowledge, in an environment where it seems everyone is investing in property, the market is saturated with buyers looking for deals. In this frenzy it pays to have both experience, expertise and local knowledge on your side.
